The stablecoin issuer Circle is exploring a previously controversial new mechanism in the crypto space—making its token USDC transactions reversible under certain circumstances.
Circle President Heath Tarbert stated in an interview with the Financial Times last Thursday (September 25) that the company is researching a mechanism that allows transactions to be "reversed" in the event of fraud or hacking incidents, while still maintaining the finality of settlement. However, Tarbert also admitted that there is an inherent "contradiction" between ensuring the immediate finality of transactions and achieving transaction reversibility.
For a long time, the crypto field has emphasized its differences from traditional finance, with the immutability of transactions seen as a core feature of blockchain. For some staunch cryptocurrency advocates, Circle's exploration seems almost "heretical." A well-known venture capitalist even stated that calling Circle's reversible transaction mechanism an attempt at blockchain is somewhat "offensive."
As banks and credit card companies begin to explore cross-border payments based on stablecoins, the demand for consumer protection has also risen. In this context, while Circle's attempt at reversible transactions has sparked controversy, it also reflects the industry's growing recognition that blockchain must adapt to mainstream financial requirements.
In fact, reversible transactions have already shown their potential value in real cases. On May 22, the decentralized exchange Cetus suffered a hacking attack, losing over $220 million in digital assets, of which validators successfully froze $162 million. A week later, validators from Sui returned the frozen funds to Cetus through a governance proposal, providing a reference for the application of reversible mechanisms in extreme cases.
Tarbert stated that although the blockchain industry is often seen as the future of finance, appropriately borrowing some characteristics from traditional finance (TradFi) could also bring benefits.
He said, "Some believe that blockchain technology, stablecoins, and smart contracts are technically superior to existing systems, but some advantages of existing systems may not necessarily exist in blockchain." He also added that some developers believe it is necessary to retain "a degree of reversibility" in transactions when fraud occurs, if all parties agree.
The reversible transaction mechanism proposed by Circle does not directly modify confirmed blockchain transactions but introduces a "counter-payment" protocol layer on its new chain Arc. This layer allows both parties in a transaction to initiate a refund or rollback operation through mutual agreement in the event of fraud or disputes, thus achieving transaction "reversibility."
The Arc blockchain uses the Malachite consensus engine provided by Informal Systems, capable of completing transaction confirmations within 350 milliseconds and supporting 10,000 transactions per second. Additionally, the Arc blockchain considers the privacy needs of financial institutions and plans to introduce a privacy protection layer that allows the amount information in transactions to be hidden, only disclosing wallet addresses, thus balancing transparency and privacy.
However, achieving both reversibility and finality of settlement still presents numerous technical challenges.
First, it must be clear which transactions can be rolled back and which cannot, to avoid abuse or malicious claims. Secondly, the design of the arbitration mechanism is also extremely complex, needing to ensure neutrality and fairness while also considering process efficiency and security.
Currently, the operation of stablecoins resembles bank transfers more than transactions processed through credit card refund mechanisms. Credit cards can first return funds to the payer, and then the payee compensates; if the merchant's account balance is insufficient, the acquirer must advance the payment, which also incentivizes them to proactively prevent fraud. In contrast, banks and stablecoin issuers typically can only freeze suspicious accounts. If these accounts are empty when a disputed transaction is discovered, depending on different jurisdictions, banks may need to bear the refund responsibility themselves, while stablecoin issuers do not bear similar responsibilities.
At the same time, the security of smart contracts themselves is also crucial, as any vulnerabilities could be exploited by attackers leading to financial losses.
Ben Caselin, Chief Marketing Officer of the crypto exchange VALR focused on the African market, pointed out that stablecoin issuers have long had the ability to freeze and reissue assets. For example, Circle and Tether have frozen or blocked the flow of digital assets at the request of law enforcement agencies. Caselin believes that while applying a reversible mechanism to decentralized cryptocurrencies like Bitcoin may undermine their core value, Circle's exploration in stablecoins may instead highlight Bitcoin's unique role in the financial system.
Caselin said, "Reversible transactions may undermine some principles of stablecoins, but for most users, they are more practical. This also makes Bitcoin's value more prominent as a tool against excessive fiscal intervention and a highly politicized financial system."
Although USDT still dominates the market, USDC's growth momentum is evident. According to Circle's financial report released on August 12, the circulation of USDC grew by 90% year-on-year in the second quarter, reaching $61.3 billion. Additionally, a report released by Wall Street brokerage Bernstein earlier this month showed that the supply of USDC has reached $72.5 billion, exceeding its expected $25 billion for 2025, indicating strong market demand for USDC.
If USDC is the first to launch reversible transactions, its competitive advantage in the stablecoin market may be further highlighted. Institutional investors and financial institutions may prefer to choose USDC with refund guarantees for cross-border payments and enterprise-level settlements, which would weaken the appeal of stablecoins like USDT and USDP in compliance and institutional scenarios. Overall, if USDC achieves reversible transactions, it could drive the entire stablecoin market towards a direction of "compliance, security, and institutional friendliness," forcing competitors to find a new balance between security and decentralization.
Circle is researching mechanisms to make USDC transactions reversible under certain circumstances to address fraud and hacking incidents. This attempt introduces a reversible transaction function while maintaining the finality of blockchain transactions, demonstrating the exploration of stablecoins in balancing security and flexibility. However, as Circle President Tarbert pointed out, there remains an inherent "contradiction" between ensuring transaction finality and achieving transaction reversibility, requiring continuous trade-offs in technology and philosophy.
Related: Finance Redefined: Ethereum (ETH) Supercycle Debate, Circle's Reversibility Blueprint, and Aster's Surge
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